International Financial Reporting Standards

IFRS measurements: cross-cutting issues

Joint World Bank and IFRS Foundation train the trainers workshop hosted by the ECCB, 30 April to 4 May 2012

The The views viewsexpressed expressed in inthis thispresentation presentation are arethose thoseof of the the presenter, presenter, not necessarily not necessarily those of the those IASB of or the IFRS IASB Foundation. or IFRS Foundation.
IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Myth 1

Everyone knows what best estimate means

IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

What does best estimate mean?

Most likely outcome? Median outcome?

< 50% chance of higher cash flows < 50% chance of lower cash flows

Whatever amount feels best? Expected value?

Average (mean) of range
IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Myth 2

The IASB prefers fair value

IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

IASB does not always prefer fair value

Provisions Impairment of property, plant, equipment, intangibles

Revenue recognition
Insurance contracts

Leases

IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Myth 3

The IASB prefers expected value

IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Expected value might be best...

if objective is to measure current value of asset or liability if transactions recur frequently if users are concerned about extreme outcomes (outliers) if expected value is as easy to estimate as other measures if the timing of cash flows is uncertain

you dont know

IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Most likely or median might be better...

if objective is to predict future cash flows if transactions do not recur frequently if outliers are less important or more uncertain than central outcomes if expected value is more difficult to measure

IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Myth 4

Expected value needs accurate data about all outcomes

IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Measuring expected value

use any suitable technique for estimating average (mean) of range if identifying range of possible outcomes:

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use same data as would use to identify most likely or median outcome include everything you know but dont make up what you dont know...

IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Measuring expected value continued

We have evidence that... Most likely outcome is 100 currency units (CU) We have no evidence that... Distribution is other than normal (bell-shaped)

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We would estimate expected value to be... CU 100

IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Measuring expected value continued

Outcome Estimated outflows
CU
CU CU

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Relative likelihood

Best case Most likely outcome

Worst case

100 200
1,000

About twice as likely as best case Unlikely, but possible

Estimate of expected value 100 CU 200 CU 1,000

CU

30% X 60% X 10%

X

30 CU 120 CU 100
CU CU

250

IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Myth 5

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Expected values take account of risk

IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Expected values may need risk adjustments

Asset 1

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Asset 2 Probability Inflows

Probability

Inflows
CU

100%

500

50% 50%

250 CU 750
CU

Expected value is CU 500 for each asset

But risk averse entity would put lower value on asset 2

IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Myth 6

15

Risk always increases discount rates

IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Risk adjustments for liabilities

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risk aversion typically increases transaction prices for uncertain liabilities

in which case, account for risk by:

1. increasing estimates of cash outflows, or 2. adjusting estimates of probabilities, or

3. reducing rates at which cash outflows are discounted to present value, or

4. adjusting the expected present value

adjusting discount rate doesnt always work

IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Questions or comments?
The IASB encourages its members and staff to express their individual views. The views expressed in this presentation are those of the presenters. Official positions of the IASB on accounting matters are determined only after extensive due process and deliberation.
IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

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The requirements are set out in International Financial Reporting Standards (IFRSs), as issued by the IASB at 1 January 2012 with an effective date after 1 January 2012 but not the IFRSs they will replace. The IFRS Foundation, the authors, the presenters and the publishers do not accept responsibility for loss caused to any person who acts or refrains from acting in reliance on the material in this PowerPoint presentation, whether such loss is caused by negligence or otherwise.

2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | EC4M UK. www.ifrs.org IFRS Foundation | 30 Cannon Street | London 6XH | UK | www.ifrs.org